The Financial Times got its hands on a confidential “debt sustainability analysis” that was circulated among eurozone finance ministers.  The gist of the analysis is that the austerity measures being imposed on the Greek population will depress growth so brutally that the government will almost certainly not meet its debt reduction targets:

…even under the most optimistic scenario, the austerity measures being imposed on Athens risk a recession so deep that Greece will not be able to climb out of the debt hole over the course of a new three-year, €170bn bail-out.

It warned that two of the new bail-out’s main principles might be self-defeating. Forcing austerity on Greece could cause debt levels to rise by severely weakening the economy while its €200bn debt restructuring could prevent Greece from ever returning to the financial markets by scaring off future private investors.

In other words, the latest rescue plan for Greece could be classified (if one were feeling deeply generous) under the category of “buying time.”  But buying time for what exactly?

In this policy brief, Dimitri Papadimitriou and Randall Wray tell us that the eurozone must ultimately move in one of two directions:  either toward a coordinated breakup or toward the development of some real fiscal and monetary policy capacities, which means having the European Central Bank step up as a buyer of last resort for member-state debt and increasing the fiscal space of the European Parliament so that it is able to stimulate growth.  The Union, in other words, must be severed or completed.

In addition to laying out the flaws in the setup of the European Monetary Union, they explain how a rolling financial crisis in the eurozone could have devastating impacts on the US financial system—a system which they argue is unstable enough that it could blow up even without pressure from across the pond.  Papadimitriou and Wray also suggest reforms for both the eurozone and the United States that might avert these crises.

The policy brief, “Fiddling in Euroland as the Global Meltdown Nears” can be read here.

Earlier one-pagers by Papadimitriou and Wray that touch on some of the same issues can be found here and here.